Sponsored Links

Performing a Basic Consolidation Print E-mail

If you love our website and want to offer your support, please order a T-shirt from www.tpolo.co.uk   

A parent company must prepare group accounts in accordance with the requirements of CA2006 Schedule 399.

The following companies are exempt from the requirement to prepare consolidated accounts:

  • Companies subject to the small companies regime

  • Companies included in the EEA accounts of a larger group

  • Companies included in the non-EEA accounts of a larger group

  • Companies with no subsidiaries that need to be included in the consolidation

Group accounts show the financial results of subsidiaries and associates, along with those of the acquiring entity, as though they were all one.

Associates are not under the full control of the acquiring entity, but under its significant influence in terms of operating and financial policies.  Typically, the acquiring entity will own between 25% and 50% of the share capital and voting rights of an associated company, and have significant influence over operating and financial decisions at board level.

Subsidiaries are entirely under the control of the parent company, with more than 50% of its shares owned by the parent company and control over its operating and financial decisions subordinated to that parent company.

The main features of group accounting are set out below:

Associated Companies


The consolidated balance sheet of the parent company will show the investment in the associate as a separate line item calculated as follows:
 

 ANet assets (capital + reserves) of associate x % holding acquired
x
 BGoodwill at year end after accumulated amortisationx
 C Investment in associate
x


The consolidated income statement will show the following amounts as separate line items, but only the % of the company acquired multiplied by the original amount in the acquired company’s own income statement: 

 A
 Operating profit
 x
 B Exceptional items x
 C Interest receivable x
 D Interest payable x
 E Tax x

This has the effect of showing the part of profit and net assets of the associated company under the control of the parent.

Subsidiaries

The consolidated balance sheet of the parent company will show the following assets and liabilities of both the parent company and the subsidiaries added together: 

        
        
ATotal of all assets line by lineX
BTotal of all liabilities line by line(x)
CReduced by intra-group transactions line by line(x)/x
DShare capital of the parent companyX
EReserves of the parent company plus reserves of subsidiary earned after acquisition by the parent company less goodwill amortisation under consolidationx/(x)
FLess minority interest in the net assets of the subsidiaryx
   
The effect of this method is to show all the results and net assets under direct control of the parent company. 

The consolidated profit and loss account (income statement) will show the following results of the parent company and its subsidiaries added together:
 
        
        
ATotal of all income line by lineX
BTotal of all expenses line by line(x)
CDeduction of profit after tax due to minority shareholders of the subsidiaries(x)
  
   

Calculating goodwill 

 

       
       
ACost of acquiring subsidiary X
 Fair value of the assets acquired:  
BShare capitalX 
CReserves at acquisitionX 
DTotalX 
ETotal X % of holding acquired (x)
 Goodwill  
FAmortisation/Impairment (x)
GUnamortised/Unimpaired goodwill x
       
       


Reserves (or profits/(losses) accumulated over a number of years) up to the date of acquisition are included in goodwill.

Reserves accumulated after acquisition are included in accumulated reserves of minority interest as appropriate.

Calculating reserves
 

       
       
AReserves of acquiring company X
BPost acquisition reserves of subsidiaryX 
Cx % acquired x
DGoodwill impaired/amortised (x)
EBalance sheet reserves x
       


Goodwill amortisation for the year is shown in expenses, and accumulated amortisation is deducted from total reserves of the parent company and its subsidiaries.

Calculating investment in associates
 

       
       
A% acquired x (share capital + reserves)  X
BUnimpaired goodwill X
CGroup’s share of net assets at the balance sheet date X
       
AProfit after tax x% acquired X
BGoodwill amortisation (X)
CShare of profit after tax of associate X
       


Goodwill amortisation or impairment during the year is deducted from expenses.

Practical consolidation: the 50% example


Using a spreadsheet, the individual trial balances of the parent company and the subsidiary can be used to calculate the consolidated trial balance before preparing the consolidated accounts.  As the consolidated accounts present results as a single entity, all inter-company transactions of companies included in the consolidation are excluded. In this example a 50% holding is first treated as an associate using the equity method of accounting, then it is treated as a subsidiary using the full consolidation.

  

 Parent

Subsid-iary/

Associate

AssociateSubsid-iaryInter-company

Consoli-dation

Adjust-ment

 
   50% Equity MethodConsolidate  

 

TurnoverAOAA+O(sales) 

 

Expenses(B)(P)(B)(B+P)Expenses(annual goodwill impairment)

 

Operating profitC QCC+Q-(annual goodwill impairment)

 

Share of associate profit--(QX0.5) – annual goodwill impair-ment---

 

Investment incomeDR-R--

 

PBTESsubtotalSubtotal(E+S-D)-(annual goodwill impairment)

 

Tax(F)(T)(F)(F+T)--

 

PATGUSubtotalSubtotal(G+U-D)-(annual goodwill impairment)

 

Attributable to:      

 

ParentHV(H-D) + ((Qx0.5)- annual goodwill impair-ment)G-D + (Ux0.5)-(annual goodwill impairment)

 

Minority interest---Vx0.5--

 

Balance Sheet      

 

Intangible assets---J-(Z+A2) x0.50-(goodwill impaired since acquisition)

 

Tangible assetsIWII+W--

 

Cost of investment in sub/assocJ-(Z+A2+ B2) x0.5 + unimpaired goodwill---

 

DebtorsKXKK+X(Sales)-

 

Creditors(L)(Y)(L)(L+Y)(Exp’s)-

 

Capital(M)(Z)(M)(M)--

 

Reserves: N1 N1+ (0.5xB2) –goodwill impairedN1+ (0.5xB2)-(goodwill impaired since acquisition)

 

Pre Acquisition-(A2)----

 

Post acquisition-(B2)----

 

Minority interest---(Z+A2+B2) x 0.5--

 

  

 

Comments
Search
Only registered users can write comments!
Gary  - preparation in consolidated accounts   |112.120.18.xxx |2012-09-26 20:46:06
The information is summarized and useful.
success daniel  - comments   |41.59.29.xxx |2012-11-21 23:50:11
morning!
my comment is that please will you put examples on how to calculate all
these,be
cause here i can se formulas only
nfowler  - @ Daniel   |SAdministrator |2012-12-09 17:18:46
Please use the spreadsheet and follow the formulas to see examples of the
calculations: http://www.uktaxandaccounts.com/index.php/Preparat
ion-of-Accounts/consolidation.html

3.26 Copyright (C) 2008 Compojoom.com / Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."